WAGE INEQUALITY AND VARIETIES OF CAPITALISM By DAVID RUEDA and JONAS PONTUSSON* HE immediate goal of this article is to explore the determinants of Twage inequality in advanced capitalist economies. Following a pe- riod in which the distribution of wages tended to become more com- pressed, most OECD countries have experienced some increase in wage inequality since 1980. However, the magnitude of change varies signif- icantly across these countries: the rise of wage inequality began earlier and/or lasted longer in some countries than in others. As we shall see, the United States stands out as the country that has experienced the most sustained rise of wage inequality, lasting at least a quarter of a century. With countries entering the 1980s at very different levels of wage inequality, the persistence of cross-national diversity remains a conspicuous feature of the data that we present below. In 1995 someone occupying the 90th percentile of the U.S. earnings distribution (the bottom of the top 10 percent) had an income that was 4.6 times larger than the income of someone in the 10th percentile (the top of the bot- tom 10 percent). At the opposite end of the spectrum, the 90–10 earn- ings ratio in Sweden was only 2.2 in 1995. To date, most of the literature on the comparative political economy of labor markets has taken macroeconomic performance as the depend- ent variable and focused on the issue of wage restraint, or the trade-off between inflation and unemployment. In the corporatist tradition in- spired by rational choice thinking, wage restraint is viewed as a public good, subject to familiar collective action problems, and divergent out- comes are typically explained in terms of institutional arrangements, which determine the ability of unions and/or employers to coordinate their wage-bargaining behavior. As we turn to explore wage-distribu- tive outcomes, this line of thinking seems less compelling, for any num- ber of (particular) wage distributions satisfy the conditions of Pareto * This article has a long history: earlier versions have been presented in numerous forums, and a great many people have commented on the research presented here. We are especially grateful to Rob Franzese, Geoffrey Garrett, Torben Iversen, Walter Mebane, Michael Wallerstein, Chris Way, and Bruce Western for their constructive criticisms, technical assistance, and encouragement. World Politics 52 (April 2000), 350–83 WAGE INEQUALITY/VARIETIES OF CAPITALISM 351 optimality. If the politics of wage restraint is essentially about coordi- nation, trust, and perhaps sanctions to avoid a suboptimal outcome, the politics of wage distribution is more accurately described in terms of a continuous process of negotiating temporary settlements among com- peting interests. In the real world the politics of wage restraint and the politics of wage distribution are, of course, opposite sides of the same coin, but as our analytical focus shifts from the former to the latter, we might ex- pect that variables which capture the power resources of organized in- terests, such as union density and government partisanship, take on greater explanatory significance relative to more formal institutional variables, such as the degree of centralization of wage bargaining. Equally important, this shift of focus invites us to think differently about institutional arrangements. If centralization of bargaining mat- ters to wage-distributive outcomes, this is not because it provides for coordination but rather because it affects the distribution of power among actors in the bargaining process.1 Quantitatively inclined comparativists are turning increasingly to pooled cross-section time-series regression analysis because it allows them to increase the total number of observations and to test relatively complex causal models with aggregate data from a small number of countries. Nevertheless, for all the sophistication of this recent quanti- tative work, more qualitatively inclined scholars still cling to the essen- tial historical-institutionalist objection to regression analysis—that it presupposes but does not prove that the relationship between inde- pendent variable X and dependent variable Y is the same across all units of observation. The radical version of this objection holds that each country should be conceived as a unique context, determining the rela- tionship between X and Y. More commonly in comparative political economy, we are told that countries cluster into a few broad, historically constituted institutional configurations. The arguments advanced by Katzenstein, Hall, Esping-Andersen, and Soskice imply that changing the value of X will have certain effects in one set of countries and quite different effects in another.2 1 Cf. Michael Wallerstein, “Wage-Setting Institutions and Pay Inequality in Advanced Industrial Societies,” American Journal of Political Science 43 ( July 1999). 2 Peter Katzenstein, Small States in World Markets (Ithaca, N.Y.: Cornell University Press, 1985); Peter Hall, Governing the Economy (New York: Oxford University Press, 1986); Gøsta Esping-Ander- sen, The Three Worlds of Welfare Capitalism (Princeton: Princeton University Press, 1990); David Sos- kice, “Wage Determination,” Oxford Review of Economic Policy 6 (Winter 1990); and idem, “Divergent Production Regimes,” in Herbert Kitschelt et al., eds., Continuity and Change in Contemporary Capi- talism (New York: Cambridge University Press, 1999). 352 WORLD POLITICS Behind our immediate goal of exploring the determinants of wage inequality, the ulterior purpose of this article is to show that regression analysis can and should incorporate the insights of the approach asso- ciated with these scholars.3 Exploring the common determinants of wage inequality across nations and over time we seek to determine whether and how these determinants vary across varieties of capitalism. Drawing on a new data set collected by the , we engage in two rounds of pooled regression analysis. In the first round we regress levels of wage inequality on unemployment rates, trade with low-wage coun- tries, female labor-force participation, union density, centralization of wage bargaining, the public sector’s share of total employment, and government partisanship. Although the first three variables are meant to capture supply-and-demand conditions, none of them turns out to be a consistent predictor of the observed variance in wage inequality; the other four variables, however, all have statistically and substantively significant coefficients. Our second regression setup adds further insti- tutional complexity by distinguishing between social market economies (s) and liberal market economies (s). To anticipate, our empirical results indicate that varieties of capitalism matter. We find some support for the proposition that conditions mute the impact of market forces on the distribution of wages. More im- portantly, our results show that conditions significantly affect either the direction or the magnitude of most of our political and institutional variables. Of particular interest to political scientists is the finding that the wage-distributive effects of government partisanship are contingent on institutional context. While leftist governments are associated with less wage inequality in liberal market economies, this is not the case in social market economies. Union density emerges as the single most im- portant factor influencing wage inequality across institutional contexts; its effects are consistently egalitarian and they are greater than those of any other independent variable within the country clusters. Our results thus support the contention that the politics of wage distribution involves conflicts between unions and employers as well as distributive conflicts between different firms and different categories of wage earners. 3 In seeking to incorporate institutional insights into regression analysis, we follow the lead of Bruce Western, Between Class and Market (Princeton: Princeton University Press, 1997); Geoffrey Garrett, Par- tisan Politics in the Global Economy (New York: Cambridge University Press, 1998); and Torben Iversen, Contested Economic Institutions (New York: Cambridge University Press, 1999). However, none of these works explicitly tests the idea that causal dynamics vary by political economy type. Previous work in this particular vein includes Philip O’Connel, “National Variations in the Fortunes of Labor,” in Thomas Janoski and Alexander Hicks, eds., The Comparative Political Economy of the Welfare State (New York: Cam- bridge University Press, 1994); and Duane Swank, “Political Institutions and Welfare State Restructur- ing,” in Paul Pierson, ed., The New Politics of the Welfare State (New York: Oxford University Press, 2000). WAGE INEQUALITY/VARIETIES OF CAPITALISM 353 We begin by describing the wage-distributive outcomes that we seek to explain. We then review the literature on the determinants of wage inequality and generate causal hypotheses pertaining to the discrete in- dependent variables identified above. Third, we elaborate on the dis- tinction between social and liberal market economies and specify how we expect this distinction to affect our causal hypotheses. The fourth section briefly addresses methodological issues, and the fifth section presents our empirical results. By way of conclusion, we address the general implications of our analysis. I. PATTERNS OF WAGE INEQUALITY The dependent variable in our analysis is a summary measure of the distribution of gross income from employment.